The changing economic scenario and the unprecedented restructuring in global financial services sector are raising concerns about the impact of a potential recession on the global outsourcing industry, concedes Kumar Parakala, Global Chief Operating Officer and Global Head of Sourcing, IT Advisory, KPMG Advisory Services.

As corporations across the world put expansion plans and discretionary spending temporarily on hold, large transformational outsourcing contracts may be postponed for at least six to nine months, he foresees, during the course of a recent email interaction with Business Line.

However, every dark cloud has a silver lining. For, changes in the business landscape are likely to bring in some real growth opportunities in the short run, feels Parakala.

“There will be increased opportunities for longer term growth in 12-36 months within the IT-BPO sector, as more companies impacted by the financial crisis will be looking at cutting costs and improving efficiencies,” he reasons.

Excerpts from the interview.

On the outlook.

Existing contracts and outsourcing in conventional areas such as the routine F&A (finance and accounting) or technical support will continue. But growth in the hard-hit sectors (especially banking, financial services and insurance) will be limited.

In general, the overall size of the outsourcing revenue is likely to shrink in the next 3-6 months.

In sectors which are not seeing as much slowdown, competition for the few available outsourcing contracts will be strong.

On how the IT firms should cope with the slowdown.

The short-term focus will inevitably be on remaining viable with lower growth rates.

Globally, IT-BPO vendors are building in the slower growth expectations and taking measures such as lowering their revenue guidance, holding back salary rises, or reducing their workforce.

The IT-BPO sector is likely to go through increased mergers to improve operational efficiencies and remain profitable/ viable.

The anticipation is that outsourcing amidst the turmoil will involve relatively smaller contracts that are quick to implement and require lower investments with quicker paybacks.

For vendors, this may mean that billing rates will remain under pressure in the near future.

Global companies, due to short-term liquidity and financial issues, may not be able to invest upfront in the setting up of IT-BPO operations.

Service providers will be required to structure the contracts differently in the next 12 months to demonstrate value and competitiveness.

On the likely opportunities in the near term.

Changes in the business landscape are likely to bring in some real growth opportunities in the short run:

A spate of merger and acquisition (M&A) activity will bring its share of legalities and will provide a fillip to legal outsourcing.

Some HR outsourcing deals may be in order, aiming to provide remediation to some of the staff post integration of companies.

Depreciation in the currencies of top outsourcing locations like India and the Philippines may provide attractive cost arbitrage, becoming an additional driver for outsourcing.

On the medium- to longer-term horizon

In the medium- to long-term — that is 12 to 36 months — cost efficiencies and business transformation in companies across industries will likely gain greater precedence than ever.

The more resilient vendors could anticipate future opportunity areas and build new and differentiated offerings for companies emerging from the turmoil.

Some of these areas may include:

Integration: Following consolidation/ changes in the market landscape, vendors will be called upon to help leverage legacy systems and processes of merged entities.

Transformation: Lowering operating costs and restructuring will be top priorities for corporations as conditions stabilise.

The larger global vendors with proven maturity in business transformation will have a head-start in positioning themselves to serve this need.

Regulation: Sweeping regulatory change can be expected going forward adding to the risk management needs of companies.

A boom in compliance-related outsourcing, similar to the one post the introduction of SOX (Sarbanes-Oxley), for instance, may be forthcoming. Further, there may be a huge demand for IT system upgrades and process transformation.

Knowledge services: As newer ways to cut costs are explored, offshoring of higher value-adding, knowledge-based work to lower-cost locations is likely.

Established destinations such as India may benefit due to higher experience and maturity in these areas.

Captives: As cash-starved companies focus on survival, they may look to monetise their investments in captive operations.

The larger third-party vendors can gain by acquiring such operations at modest valuations, and secure the parent company’s business through long-term deals.

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